Online lenders get pinched by market jitters
Recent market jitters are starting to hit online consumer lenders.
As in other credit markets, consumer loan funding has felt the effects of investor uncertainty as the United States begins to move to higher interest rates and many junk bonds companies are in difficulty.
Although consumer credit movements have been modest compared to the pain in other parts of the bond market, there are early signs of damage, including transaction delays, higher funding costs and a lower prices of loan-backed securities.
In a sign that more borrowers will also have to pay higher borrowing costs, LendingClub Corp. said on Tuesday it would raise interest rates for new borrowers by 0.25 percentage points, matching the Federal Reserve’s earlier decision to raise its short-term target rate. .
Fast-growing online platforms such as Lending Club and Prosper Marketplace Inc. find borrowers and sell their loans to investors, collecting fees in the process. The platforms rely on the ability to offer borrowers better terms than traditional banks, partly because they have lower costs and because some of the investors, such as listed funds and those who buy securitized loans, have relatively low return expectations.
This may change. Citigroup Inc.,
which since August has sold more than $1 billion in securitized loans from online platform Prosper, has had to offer progressively higher yields on each trade to attract investors, according to PeerIQ, a market tracking firm data, or “peer-to-peer”, ready.
The bank priced the first package of loans in August with a weighted average yield about two percentage points above the benchmark London interbank offered rate, according to PeerIQ. It priced the second package in October at 2.5 percentage points above Libor and the third, completed in mid-December, at nearly three percentage points above Libor.
The higher yields could lead to higher borrowing costs or thinner margins for banks and lending platforms.
“You see discrepancies [above benchmarks] expand in credit markets, and this is also true for loan securitizations in the market,” said Ram Ahluwalia, Managing Director of PeerIQ.
The next deal to watch: Deutsche Bank is staging a sale of around $1 billion in personal loans bought earlier by Santander Consumer USA Holdings Inc.
via Lending Club, according to people familiar with the matter. It is not yet clear whether the sale, which began in November, will take place at a price below face value. If so, it could indicate that buyers are demanding higher yields on loans or that they are increasingly concerned about the ability to resell loans.
Share prices of London-listed funds that buy loans in the market also fell. VPC Specialty Lending Investments PLC has fallen 9.2% since early October. VPC is managed by Victory Park Capital, a Chicago-based asset management firm that invested more than $1.7 billion in online market lending deals from 2010 to earlier this year.
Ranger Direct Lending Fund PLC, which raised $200 million at a May listing in London, withdrew a planned additional share offering from its fund last month. Its shares are down 2.6% since early October.
Bill Kassul, a partner in the fund, said the bid attempt was affected by the collapse of a European lending platform, the poor performance of shares of US-listed platforms such as Lending Club and investors recalling new bets in general.
“Investors said they had allocated enough for 2015, and that would be a [challenge] for them to have to sell other funds,” he said. If markets improve, he said, supply could return next year.
The volume of loans granted by Lending Club, Prosper and other similar platforms has increased over the past few years. The investment vehicles that buy these loans have grown alongside the market, including listed retail funds.
Market loan-focused funds raised more than $8 billion in 2015, more than six times the amount raised last year, according to PeerIQ figures and a Wall Street Journal analysis of securities filings. This includes more than $1.5 billion in investment funds launched on the London Stock Exchange to take advantage of UK rules to buy loans and sell the shares to retail investors.
Now industry experts are wondering if the growth will continue, especially in light of the credit crunch that forced a Third Avenue Management LLC high-yield mutual fund and others to close or halt trading. redemptions.
“Markets have been tougher over the past three months,” said Al Goldstein, chief executive and founder of Avant Inc., an online lender that began securitizing some of its loans this year. Avant aims to do more securitization deals next year, Goldstein said.
Still, with unemployment and household debt levels low, he expects strong growth as consumers continue to seek out and repay loans online. “I’m optimistic, it’s a bit of a blip,” Mr. Goldstein said.
—Peter Rudegeair contributed to this article.
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